What is an entrepreneur?

One who initiates and assumes the financial risks of a new enterprise and undertakes to provide or control its management.

What are the main factors to consider in deciding in what form a business should organize?

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    • Ease of creation
    • Liability of the owners
    • Tax considerations
    • Need for Capital

What is a sole proprietorship?

The owner is the business; there is no separate business organization

What formalities are required to form a sole proprietorship?

There are few legal forms involved in setting up this type of business; it is created at will by the owner.

How are business profits and losses taxed in a sole proprietorship?

Business profits and loss are taxed as personal income in this single-owner business form.

What personal liability does the sole proprietorship have for business debts?

The business owner has unlimited liability, or legal responsibility, for all obligations incurred in doing business.

What is the definition of a general partnership?

This business form arises from an agreement between two or more persons to carry on a business for profit.

What is the amount of control of the business of each partner in a general partnership?

Partners are co-owners of the business and have joint control over its operation and the right to share in its profits.

What are the tax consequences of a general partnership?

The firm itself does not pay income taxes; profits are passed through to the partners and taxed as individual income.

What is the personal liability of general partners for partnership debts?

General partners are personally liable for partnership obligations; personal assets of the parners are subject to creditors' claims.

What is a limited partnership?

This business form has one or more general partners and one or more limited partners.

How is a limited partnership formed?

Formed by agreement of the parties. A certificate of limited partnership is filed with the appropriate state office. A charter is issued by the state.

What is the personal liability of a general partner in a limited partnership for debts of the business?

The general partner(s) assumes responsibility for the management of the partnership and unlimited liability for all partnership debts.

What is the personal liability of a limited partner in a limited partnership for debts of the business?

The limited partners assume no liability for partnership debs beyond the amount of capital he or she has contributed, provided they take not active part in management of the company.

What control of the business can a limited partner have?

A limited partner has no control over the general management or operation of the business. Limited partners may not retain limited liability if they atively participate in management.

What are the tax consequences of a limited partnership?

Generally the same as a partnership - each partner pays pro rata share of income taxes on net profits, whether or not they are distributed.

Who owns a corporation?

Corporations are owned by shareholders -- those who have purchased ownership shares in the business.

How is a corporation formed?

A corporate charter is issued by the state where the business incorporates; it is governed by statute.

What are the tax consequences of being in the corporate form for shareholders?

Double taxation - corporation pays income tax on net profits, with no deduction for dividends, and shareholders pay income tax on disbursed dividends they receive.

How are tax consequences different for an S-Corp?

An S Corporation is not taxed at the corporate level; profits are passed through to shareholders and taxed as income.

What are the benefits of operating in the corporate form?

A corporation has the ability to raise capital by

selling shares of corporate stock to investors.

What is the liability of a shareholder for debts of the corporation?

Shareholders are not liable for the debts of the corporation.

What is a closely held corporation?

A closely held corporation is privately-owned; its shares are not publicly traded on the stock market.

What is a limited liability company?

A limited liability company (LLC) is a hybrid form of

business enterprise that offers the limited liability of the corporation but the tax advantages of a partnership.

How are LLCs formed?

An LLC is formed by an agreement of the member-owners of the company. Articles or organization are filed with a central state agency, which issues a charter.

What must be included in the name of a limited liability company?

The words "Limited Liability Company" or the initials "LLC"

What are the benefits of operating as a LLC?

Benefits of an LLC:

• Members' liability limited to their investment
• LLC with 2+ members can be taxed as a partnership or as a corporation.
• Flexibility in terms of business operation and management.
  

What sorts of topics should be addressed in the operating agreement of an LLC?

An operating agreement should address management, decision-making procedures, division of profit, transfer of member interests, whether the LLC will be dissolved on the death or departure of a member, etc.

What duties do the managers of a LLC owe the company?

Managers of a LLC owe fiduciary duties to the LLC and its members, including the duty of loyalty and the duty of care.

What kinds of businesses are especially likely to operate in the form of a limited liability partnership?

Professional services businesses (Law firms, Accounting firms, Medical practices, etc.)

Family businesses

What is the benefit of operating as a limited liability partnership rather than a general partnership?

LLP allows professionals to avoid personal liability for the malpractice of other partners.

What is a franchise?

A franchise is an arrangement in which the owner of a trademark, trade name, or copyright licenses others to use the trademark, trade name, or copyright in the selling of goods or services.

What is a distributorship franchise?

Arises when a manufacturing concern licenses a dealer to sell its product.

Example - automobile dealership

What is a chain style franchise?

Exists when a franchise operates under a franchisor's trade name and is identified as a member of a select group of dealers that engages in that franchisor's business.

Example - McDonald's

What is a manufacturing or processing plant franchise?

Exists when the franchisor transmits the essential ingredients or formulas to make a particular product. The franchisee then markets the product wholesale or retail in accordance with the franchisor's standards.

Example - Coca Cola bottling

What sorts of payments should a franchisee expect to have to make to the franchisor?

Franchisee can expect to pay an initial fee or lump-sum price for the franchise license, and in most situations a stated percentage of the annual sales or annual volume of business done.

What topics would typically be addressed in a franchise contract?

• Business premises - leased vs. purchased, and whether the franchisor supplies equipment and furnishings.
• Location - territory to be served
• Business organization - requirements for form and capital structure. Standards of operation related to sales quotas, quality, and record keeping
• Quality control by franchisor - supervision and control
• Pricing arrangements - franchisee may be required to purchase certain supplies from franchisor
• Termination of the franchise
  

What is the danger for the franchisor in exercising too much control over the operation of the business of his franchisee?

They may incur liability under agency theory for the acts of their franchisees' employees.

What is the harm to the franchisee if his franchise is terminated?

The franchisee, who normally invests a substantial amount of time and funds in the franchise operation, may receive little or nothing for the business on termination.

How is a corporation formed?

A corporation is formed when a charter is issued by a state-created statutory authorization.

What are Articles of Incorporation, and what is included in them?

Articles of incorporation, or corporate charter, include information about the corporation such as its function and the structure of its organization.

What are by-laws, and what are included in them?

Bylaws are rules for managing the firm.

What occurs at the first shareholder meeting after a corporation is formed?

Bylaws are adopted and a new board of directors is elected.

How do corporate directors get their jobs?

Corporate directors may be appointed in the articles of incorporation; after that they are elected by shareholders.

How do corporate officers get their jobs?

Corporate officers are hired by the corporation's board of directors to run the company.

When a corporation has profits that it does not distribute as dividends, what are they called?

Retained earnings

What Constitutional protections apply to corporations?

14th Amendment:

• Right of access to courts
• Right of due process
• Freedom from unreasonable search and seizure
• Protection from Double Jeopardy

1st Amendment:

• Freedom of speech

What are corporations liable for torts of their employees and officers?

Corporations are liable for the torts commited by its agents or officers within the course and scope of their employment.

When are corporations liable for crimes?

Corporations can sometimes be held liable for criminal acts of its agents and employees, provided the punishment is one that can be applied to the corporation.

What types of corporate action must be approved by shareholders?

Shareholders vote to amend the articles of incorporation and bylaws, approve mergers or dissolution of the corporation, and sale of all or substantially all of the corporation's assets.

How often must a corporation hold a shareholder meeting?

Annually

What is a quorum?

The minimum number of members of a body of officials or other group that must be present in order for business to be validly transacted.

What is a proxy?

A written agreement in which a stockholder authorizes someone else to vote the stockholder's shares in a certain manner.

What is cumulative voting?

A method of voting designed to allow minority shareholders representation on the board of directors.

# Members to be elected * # voting shares

Why do bylaws have to provide for compensation of directors?

Because directors have a fiduciary relationship and there must be an express agreement or provision for compensation in order for them to receive money from the funds that they control.

Can directors vote by proxy?

No; directors must vote in person.

Can an individual director bind the corporation by his action?

No individual director can act as an agent to bind the corporation.

What are examples of decisions made by boards of directors?

• Declaration and payment of corporate dividends to shareholders
• Authorization of major corporate policy decisions
• Appointment, supervision, and removal of corporate officers and other managerial employees and the determination of their compensation
• Financial decisions, such as the issuance of authorized shares and bonds

What is a fiduciary?

A person who has a legal and ethical duty to act in the best interests of another person.

What fiduciary duties do the directors and officers owe to the corporation and shareholders?

1. A duty of care - to be honest and use prudent business judgement in the conduct of corporate affairs

2. A duty of loyalty - requiring the subordination of the self-interest of the directors and officers to the interest of the corporation.

What is required for a transaction by the board of directors to be valid when there is a conflict of interest between the corporation and one of the officers or directors?

Transaction is valid if it is

• fair and reasonable to the corporation
• fully disclosed
• approved by a majority of the disinterested directors or shareholders

What is the business judgement rule?

Honest mistakes of judgement and poor business decisions on the part of corporate management do not make them liable to the corporation for resulting damages.

What is a stock certificate?

A certificate issued by a corporation that evidences ownership of a specified number of shares in the corporation.

What are preemptive rights and what effect do they have?

Give preferences to shareholders over all other purchasers to buy shares of new issues of stock in proportion to the percentage they already own.

Allow shareholders to retain their proportionate control over the firm after new stock issues.

What is a dividend?

A distribution of corporate profits or income ordered by the directors and paid to the shareholders in proportion to their respective shares in the corporation.

When is payment of a dividend illegal, and what is the liability of a shareholder if a dividend is paid illegally?

When it is paid while the corporation is insolvent or if it is improperly paid from an unauthorized account.

If a shareholder knew that a dividend was illegal when it was received, he is liable for repaying that money to the corporation.

Can a board of directors not declare a dividend when the company has made a profit?

Yes, the corporation can decide to retain earnings.

What is a shareholder's right of inspection?

It is limited to the inspection and copying of corporate books and records for a proper purchase, provided the request is made in advance.

What is a shareholder derivative suit, and where would money recovered in the suit be paid?

It is a lawsuit brought on behalf of the corporation by the shareholders.

Money recovered is paid to the corporation.

Why would a court pierce the corporate veil and make a shareholder liable for a corporate debt?

If a corporate entity is used by its owners to perpetrate a fraud, circumvent the law, or in some way accomplish and illegitimate objective.

What is par value?

The face value of shares of stock; their formal cash-in value.

When does a shareholder have a fiduciary duty to other shareholders?

When they own enough shares to exercise de facto control over the corporation.